Federal Court: Gas Station Franchisee Showed Violation Where Right of First Refusal Offer Was Not the Same

There is a federal law that governs franchisor-franchisee relationships among petroleum companies and gasoline stations called the Petroleum Marketing Practices Act (the “Act”). See 15 U.S.C. § 2801 et seq. The Act applies any time there is a franchise related to “the sale, consignment, or distribution of motor fuel.” When Congress enacted the Petroleum Marketing Practices Act, the concern was to prevent arbitrary or discriminatory discontinuance of franchise agreements. The Act gives the franchisee various rights and allows the franchisee to maintain civil actions against any franchisor who violates the Act.

With respect to termination or nonrenewal decisions, the Act requires that a franchisor only exercise its rights in good faith without any sort of self-dealing. Where the franchisor is terminating a franchise because the franchisor is selling the underlying property, the Petroleum Marketing Practices Act imposes additional requirements. Such a sale may only be made if

• The sale be in “good faith and in the normal course of business” and
• Either the franchisor makes a bona fide offer to sell the property to the franchisee
• Or the franchisor offers the franchisee a right of first refusal to purchase the property at the same price and on the same conditions as the offer to the third party

See Petroleum Marketing Practices Act, § 2802(b)(3)(D). As a recent case demonstrates, a franchisor violates the Act if the right of first refusal is not at the same price and on the same conditions as the offer to the third party. See Abe & Nahed, Inc. v. Global Companies LLC, No. 18-12425-FDS (US Dist. Mass. May 28, 2019). If you are a franchisor or franchisee here in the Golden State facing this situation, it is essential to hire an experienced San Diego corporate attorney to review the terms and conditions of the franchise agreements, the right of first refusal, and the related documents.

In Abe & Nahed case, the gasoline station originally leased from ExxonMobil Oil Corporation, Exxon transferred the underlying property to Global Companies, LLC (“Global”). In the normal course of business, Global decided to sell the underlying property and gave a notice of termination to the franchisees, Abe & Nahed, Inc (“A&NI”). As required by the Act, Global offered Abe & Nahed, Inc. a right of first refusal. But a detailed reading of the right of first refusal and the related property sale/purchase documents showed that the offer to A&NI was not on the same terms and conditions than the offer to the prospective third party buyer. In particular, there was a provision in the property sale/purchase that specifies that, if the property was to be used for the storage or sale of petroleum products at any time over the next 50 years, then the products must be supplied by Global. Because A&NI intended to continue operating as a gas station, this provision applied to them. However, the prospective third-party buyer did not intend to sell gasoline and petroleum products. As such, A&NI faced potentially higher costs than those imposed on the prospective third-party buyer. Further, the right of first refusal and the property purchase/sale agreement imposed more obligations on A&NI than those imposed under the franchisor-franchisee agreements. That is not allowed by the Petroleum Marketing Practices Act.

Upon discovering these details, A&NI brought suit in federal court in Massachusetts. Since the Act applies evenly across the country, cases decided in other states are important to gasoline franchisees here in California. A&NI argued that the right of first refusal was not for the same price because it was not on the same terms and conditions and that, therefore, Global had violated the Act. Because A&NI would be required to buy petroleum products from Global for the next 50 years, the cost to A&NI was substantially higher than the cost to the third-party. The court agreed with A&NI and denied Global’s efforts to have the case dismissed. The court concluded that, as presented, A&NI had made a proper claim for violation of the Act.

Contact San Diego Corporate Law

For more information, contact franchise law attorney Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to review your franchise disclosure documents and agreements, help with the purchase (or sale) of a San Diego franchise, and assist with any business-related matter. Like us on Facebook.

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